I understand that this edition of Essence includes an interview with Robert De Niro and I therefore thought it appropriate to choose a title for this article that would be fitting of a film he might star in.
Reminded of the Godfather movies I realise that one of the advantages of organised crime is that unofficially held assets are unlikely to be subject to the scrutiny of Her Majesty’s Revenue & Customs (HMRC) on death. We are all going to die someday and when our particular day comes it won’t just be the undertaker measuring up. HMRC will be casting their slide rule over our assets. Inheritance Tax (IHT) is becoming an increasing important revenue raiser for the Exchequer and although politicians might pay lip service to the idea in order to pander to the Electorate, it is unlikely that we will see a fundamental relaxation in the rules that determine how much IHT, if any, is paid on the assessment of your wealth.
Too many people fail to give proper consideration to IHT planning. Taking no action should be a result of informed choice rather than inertia. Often, there are simple steps that can be taken to improve the position for your beneficiaries.
The first step is to carry out an assessment of the likely value of your Estate. This figure should then be compared with relevant exemptions and reliefs. Exemptions include the nil rate band (no tax is payable on the first £325,000 of your Estate) and bequests to a spouse or registered charity. There is also an exemption for gifts made more than 7 years prior to death; more recent gifts are deducted from your nil rate band. Business property relief (BPR) provides a 100% discount for business assets; as does agricultural relief (in both cases there are stringent criteria regarding what does and does not qualify).
Any value over and above the exemptions and reliefs that apply to your Estate will be assessed to IHT at the rate of 40%, reduced to 36% if at least 10% of your Estate is bequeathed to charity.
For a married couple it is usual for assets to be passed to the survivor on the first death. Therefore, the assessment to IHT will be delayed until the second death. The nil rate band that is unused on the first death is carried forward and used on the second death. Taking a simple example of a husband leaving his entire Estate to his wife and on her death their joint Estate passing to their children, the first £650,000 of the Estate would be tax-free and the remainder taxable. If the Estate were £1m the tax bill would be £140,000.
Alternatives available for those wishing to remove or reduce a prospective IHT liability are extensive and there are lots of ‘off the shelf’ financial products to assist the process. However, it is important to get the balance right. Take action if appropriate but, at the other extreme, be conservative. Estate planning often entails reducing your wealth and you have to be sure that you do not give away what you might need for yourself. In other words, your standard of living and general financial security shouldn’t be compromised as a consequence of reducing the tax burden on your assets when they pass to your beneficiaries. .
Assume the most costly scenario in terms of your financial needs – for example, you live until you are 105 and need to stay in an expensive care home for a number of years. Take account of guaranteed sources of income such as occupational and State pensions because the more secure income you have the lower your dependency on your assets. If you have surplus funds after providing for the most costly scenario, you can afford to give money away now.
Everyone has different circumstances and requirements. This is why IHT planning should involve a consultation with a financial planner to establish what is both possible and sensible. Finding a solution suitable for your circumstances should be planning-led rather than product-led as a strategy should often combine a range of approaches or actions. This is one of many reasons why engaging a chartered financial planner to tailor a suitable strategy is likely to be a more sensible approach, and certainly less of a commitment than entrusting your family silver to the Godfather….